Title Topics: Foreclosures and Short Sales, What’s The Difference?

Posted by Jana Swift
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Let’s start with the definitions:

Foreclosure is the legal process by which mortgaged properties may be sold to pay off a mortgage loan that is in default.  If your loan is in default, it typically means that the borrower is behind on their mortgage payments. In the event of a foreclosure, the mortgage in first lien position  will be repaid before any other mortgages.

A short sale is when you sell your home for less than the balance remaining on your mortgage.  A short sale is used as an alternative to  avoid foreclosure on a home.  If the mortgage company agrees to a short sale, the owner can sell their home and pay off all (or a portion of) their mortgage balance with the proceeds from the transaction.

Does a foreclosure or a short sale negatively affect your credit score?
In short (no pun intended!), the answer is YES.  Both a foreclosure and short sale have negative effects and put a large dent in your credit score.  Even scores in the 700’s have dipped to the 500’s.  Don’t fret too much though, because the housing market has been on a decline, a foreclosure or short sale on a person’s credit is no longer an uncommon circumstance, but now there is more
opportunity to rebuild your credit.
Something to consider: 
foreclosure or short sale?
If you think you are going to become behind on your mortgage payments and can’t decide whether to let your home go into foreclosure versus attempting a short sale, you might want to consider the obligatory waiting period before you will be able to buy another home with a mortgage.   The wait time to obtain approval on a mortgage for a new home could be under two years for a short sale (if your payments were current or not delinquent).
That’s versus the two to eight years that you could have to wait if your property went into foreclosure.  When making the decision, you should consult with a real estate attorney or your tax advisor  for advice and to clearly understand the most current guidelines.

Any Questions or comments?  Let us know!